Extract

Once a firm that is going public has determined its market valuation and the amount of funds it plans to raise, finance theory has little to say about whether the firm’s choice of an offer price level for its shares and the number of shares to offer affects shareholder wealth. Most studies assume that this selection is economically irrelevant. Therefore the attention that firms and markets pay to such ‘mere accounting exercises’ has frequently intrigued financial researchers. Fernando et al. (2004) empirically analyze the informativeness of initial public offering (IPO) price levels and document systematic differences across similarly sized firms that pick different price levels when going public, showing that higher-priced IPOs use higher-reputation underwriters, have higher institutional ownership and manifest a lower probability of encountering financial distress.